Sales Tax 101

Welcome to Otter University! We've simplified the 5 key parts of sales tax into short lessons everyone can understand. Ready to roll? Let's do this!

What is sales tax?

Sales tax is a fee assessed on products or services when the item is purchased. Sales tax is generally paid by the purchaser, but the seller must document the transaction, collect the proper amount of tax and pay the applicable tax.

Why is sales tax collected?

Sales tax revenues are used at the state and local levels to pay for things like education, roads and fire departments. States depend on these revenues to fund many of the services their residents use every day, so they are diligent about collecting the money from companies that do business within the state.

Why is sales tax so complex?

Most businesses are required to collect some form of sales tax, however, sales tax is not collected at the national level. Instead, each state determines their own tax rate for different items, and even local taxes can vary within states. This means we have more than 10,000 different tax rates in the U.S. alone – creating an incredibly complex system to navigate.

Does every state collect sales tax?

No. 45 of the 50 states plus the District of Columbia collect sales tax. The states that do not collect state sales tax are:

  • Alaska*

  • Delaware

  • Montana

  • New Hampshire

  • Oregon

*Although Alaska does not have a state-wide sales tax, they allow local sales tax to be charged.

How are sales tax requirements determined?

The requirements of sales tax depend on several factors:

  1. What you’re selling,

  2. Where you’re selling,

  3. Who your customers are and

  4. How much you sell.

Companies must evaluate each transaction to determine sales tax requirements, which can feel overwhelming. That’s exactly why we created OYA.

What is nexus?

Nexus is a tool that helps businesses determine their sales tax requirements by defining connections between businesses and states. If a business sells a taxable item, they can use nexus to evaluate the transaction details and determine what amount of sales tax must be collected in each state.

What is the sales tax collection process?

You can think about the sales tax collection process in 5 steps.

  1. Companies determine their tax obligation based on what they sell, where they sell it, who purchases the items and how much of the items are sold (a nexus analysis).

  2. Companies request a permit to collect sales tax from each state where sales tax is required.

  3. Each state provides the permit, sales tax payment deadlines and payment cadence.

  4. The company collects sales tax on each transaction based on the state and local rates, retaining documentation of the transaction details for sales tax tracking purposes.

  5. The company remits payment to each state as required, using the assigned payment cadence and deadlines.

Where should I start?

Right here! OYA was designed for small and mid-sized business owners or CPAs serving small to mid-sized companies. Our tools are easy to use, simple enough that everyone can understand and affordable so you can continue to invest in growing your business.

Let's get started.

Up Next: Sales Tax 201